How Argentina Settled a Billion-Dollar Debt Dispute With Hedge Funds

Dan Pollack, the court-appointed mediator for a deal between Argentina and its debt holders, had a rule of no pens and paper during crucial negotiations.Credit
Sasha Maslov for The New York Times

The Waldorf Astoria hotel in Manhattan has long been a location for secret diplomacy, but few meetings there would have seemed as unlikely as the one that took place one day in early December.

In a hotel conference room, a top Argentine politician drank coffee with two hedge fund executives — a meeting that was nothing short of remarkable after more than a decade of bitter legal skirmishes between Argentina and a group of disgruntled debt holders who at one point seized an Argentine Navy ship. The previous Buenos Aires government reviled the hedge funds as “vultures.”

That meeting on Dec. 7 between Luis Caputo, who days later would be sworn in as Argentina’s finance secretary, and Jonathan Pollock and Jay Newman from Elliott Management, the $27 billion hedge fund founded by Paul E. Singer, was the start of a rapprochement leading to a momentous debt deal that has now allowed Argentina to rejoin the global financial markets that it had been locked out of for 15 years.

Last week, Argentina successfully sold $16.5 billion in bonds to international investors, a record amount for any developing country. And on Friday, Elliott and the other bondholders finally received their reward in the form of billions of dollars in repayment, representing returns worth multiple times their original investments.

The negotiations that led to the deal were set in motion by the election in November of President Mauricio Macri, who ran on a promise to reignite Argentina’s flailing economy. Striking a deal with the country’s aggrieved bondholders was central to getting that done.

How Argentina and the hedge funds were able to break the long stalemate and reach a deal in a matter of weeks is a story of furious back-channeling and clashes that nearly derailed an agreement. Details of those negotiations have emerged from interviews with eight people who were involved in those meetings, as well as court filings and emails reviewed by The New York Times. Many of those people spoke on condition of anonymity because they were not authorized to speak publicly.

There were moments when the talks nearly fell apart. Three days before a deal was signed with Elliott, Mr. Caputo, exasperated by a back-and-forth with bondholders over whether they would return government assets they had seized, emailed the court-appointed mediator: “THIS IS A JOKE; NO DEAL.”

That mediator, Daniel Pollack — who had not previously met Mr. Pollock at Elliott — was appointed by the court in June 2014 and played a central role in the final negotiations.

Indeed, hours before his December assignation with the Elliott executives, Mr. Caputo had been just a few blocks down Park Avenue at the offices of the McCarter & English law firm. There, he introduced himself to Mr. Pollack, a prominent trial lawyer best known for arguing two landmark mutual fund cases before the United States Supreme Court in 1979 and 1983.

Mediating in closed-door negotiations, Mr. Pollack cajoled both sides, at times resorting to theatrical moves like getting a court order to summon Mr. Singer, the founder of Elliott, to his office.

Mr. Pollack’s rule of no pens and paper during crucial negotiations frustrated some, with two hedge fund managers complaining privately that the mediator was an obstacle to the settlement process.

Others spoke highly of Mr. Pollack’s ability to get a deal in a matter of weeks.

“You have to give Dan Pollack immense credit for creating an environment where, if they wanted to, they could get together and have a discussion,” said Michael Straus, a principal at Montreux Partners and one of the first in the group originally led by NML Capital, a unit of Elliott, to sign a deal.

Elliott executives also formed their own back channel, forged with an influential Argentine businessman, Marcos Mindlin, whom they met at the World Economic Forum in Davos, Switzerland, in January. At times, Mr. Mindlin, who is managing director of Pampa Energía, one of Argentina’s biggest energy companies, was used to communicate with Argentina’s negotiators.

Despite the groundwork that had been laid, formal negotiations got off to a rocky start.

At a news conference in Davos, President Macri had insisted that Argentina’s proposal would be made public.

So on Feb. 1, when Argentine officials presented an informal agreement to a group of six hedge funds — Elliott’s NML Capital unit, Aurelius Capital Management, EM Ltd., Montreux Partners, Bracebridge Capital and Davidson Kempner — several people in the room loudly protested the public approach.

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But two of the firms, Montreux Partners and EM, accepted Argentina’s proposal. EM’s deal, which was signed by its lawyer, Kenneth E. Johns, had been written out on a piece of notepad paper.

Argentina struck another deal that same week to pay $1.35 billion to a group of Italian investors who were holding defaulted bonds. The other four main bondholders instead submitted a document outlining their terms and the conditions of any agreement.

Undeterred, on Feb. 5, Argentina publicly announced an offer to pay $6.5 billion to the holdout bondholders.

“After a 15-year legal battle we’re going to agree to a long-form napkin?” Mr. Pollock said in an interview, referring to the deal with Montreux Partners and explaining the initial reluctance. He added that he had a duty to his investors to negotiate something more secure.

The core group of bondholders, led by NML, remained obstinate.

In a recent interview, Mr. Pollack, the mediator, said that the bondholders had wanted to turn negotiations into a complex debt restructuring, while he argued that a business transaction would be simpler. The holdouts were deeply cynical, he recalled.

Argentina’s recent history was still fresh on their minds. The populist administration of Mr. Macri’s predecessor, Cristina Fernández de Kirchner, had an economy minister with Marxist leanings who lectured bondholders that they would never get more than 30 cents for every dollar of their bonds.

“If you are at war long enough, it’s very difficult to shift to a mode of peace,” Mr. Pollack said.

Concerned that they would not be able to get a deal with the conditions they wanted, one Elliott executive met with Mr. Mindlin on Feb. 17 in New York and expressed his concerns over dinner. The following day, Mr. Mindlin spoke with Mario Quintana, the secretary of the government’s economic cabinet. Argentina representatives met with bondholders later that day.

On Feb. 19, Judge Thomas P. Griesa of Federal District Court in Manhattan, who presided over the dispute in the courts, dealt a blow to the remaining holdouts by agreeing to lift an injunction that prevented Argentina from making any bond payments or raising new money.

Under his ruling, Judge Griesa had set a deadline of Feb. 29 for any deal to be recognized. While the economic terms of the deal with the holdouts had been agreed upon, some of the smaller details were still in dispute.

After several frantic meetings and heated discussions over conditions, including that the hedge funds continue to have a say in Argentina’s future domestic market fund-raising, NML, Aurelius, Davidson Kempner and Bracebridge signed a deal on Feb. 28. In the agreement, Argentina agreed to pay $4.65 billion to the hedge funds, which included bond principal, interest and “certain legal fees and expenses incurred.”

Two days earlier, Mr. Pollack, the mediator, requested that Judge Griesa sign an order summoning Mr. Pollock and Mr. Singer of Elliott to his offices.

On Friday, Argentina paid all of the holdout creditors who had agreed to deals — a total of $9.3 billion, the economy ministry said. Elliott received $2.4 billion, a 392 percent return on the original value of the bonds, according to the ministry.

Writing to Elliott employees hours later, Mr. Singer thanked them for “persisting through this lengthy, complicated and contentious process.”

Correction: April 26, 2016

An article on Monday about the settlement between Argentina and a group of disgruntled debt holders referred incorrectly to the returns received by hedge funds holding defaulted bonds. They were in the hundreds of percentage points, not hundreds of times, their original investments.

Jonathan Gilbert contributed reporting from Buenos Aires.

A version of this article appears in print on April 25, 2016, on Page B1 of the New York edition with the headline: How Argentina Settled a Billion-Dollar Dispute. Order Reprints|Today's Paper|Subscribe